Freeman

ARTICLE

Specialization and Exchange

OCTOBER 01, 1989 by GENE SMILEY

Dr. Smiley is Associate Professor of Economics at Marquette University.

I have spent the last 17 years teaching economics to college students. During this time my wife and I have owned two homes, neither of which we built ourselves. To furnish our homes we have purchased chairs, tables, sofas, coffee makers, stoves, refrigerators, television sets, stereo systems, lamps, computers, and an in describable mosaic of other home furnishings. When we wanted an automobile, a lawn mower, and a snow thrower we also purchased these.

Like almost everyone else, I have found that I can be better off if I specialize in a few activities-such as college teaching—and let other people specialize in producing other services or products, and then trade with them. The advantages of this market process are so obvious that most of us simply take them for granted.

The metropolitan Milwaukee area where we live produces a multitude of products, most of which are shipped to other areas of the country or sent abroad. Much of that production requires machines and tools produced in other parts of the world. Elsewhere in our state many products, such as automobiles, motorcycles, tractors, paper goods, and magazines, are shipped to other states and countries.

The gains that arise from such specialization in production and market exchanges are the same whether we consider two individuals, the citizens of two dries, the citizens of two states, or, just as important, the citizens of two nations. For some reason, however, many people deny that international specialization in production and the consequent exchange of products are beneficial.

Recently Such thinking led American officials to “convince” Japanese leaders to restrict auto exports to the United States. The U.S. government has continued to prohibit the importation of inexpensive sugar and cheese products. Because some Japanese computer chip makers refused to go along with a world cartel set up by the United States government to raise chip prices, U.S. officials imposed large tariffs on selected Japanese computer imports. For some years now American steel firms have received protection from imported steel through “voluntary restraint agreements.” The list of U.S. trade restrictions goes on and on.

Congress is preparing a number of trade bills designed to “protect” American firms and labor even further. Michigan Senator Donald Riegle has said that these moves “will strengthen our na-tion-and begin to restore our international financial standing.”

If the citizens of the United States can be made better off by reducing international exchanges and thus specialization, then the same logic must apply to individual states. The citizens of Wisconsin, Michigan, New York, California, or any other state should be made better off if their state governments reduce or eliminate trade with other states. Why stop there? Why not give the citizens of Los Angeles, San Francisco, Chicago, Milwaukee, Detroit, or New York an improved quality of life by having their city governments reduce or eliminate trade with other cities? It would be even better if, say, the residents of the Sherman Park neighborhood of Milwaukee were prevented from trading with all outsiders. Finally, if this restriction of trade is so beneficial, then let us have the government stop the members of each household from trading with any other household. Let each household become self-sufficient.

The logical conclusion is that if specialization and trade are harmful at the international level, then surely they must be harmful all the way down to the level of each individual. We recognize that this is absurd because it would impoverish us all. Voluntary specialization and trade at any level simply are not harmful.

If the government imposes quotas or tariffs on, say, imported steel, then reduced supplies and higher prices for imported steel allow domestic steel producers to sell more Steel and raise their prices. That, in fact, is what has recently happened. Firms that purchase steel, such as the producers of stainless steel kitchenware, are facing rising prices. Rexworks, a small industrial firm in Milwaukee, found that even though it had an excellent year in production and sates, unanticipated increases in steel prices wiped out $2 million in profits. Meanwhile the steel producers are reaping huge gains.

These harmful effects extend far beyond the direct purchasers of the protected products. The reduced sales of foreign steel decrease the number of American dollars foreign countries receive. Because foreigners have fewer dollars, their demand for American exports must fall.

American exporters find that there is less foreign demand for their products, and their sales and prices and incomes fall.

While the measures designed to protect selected U.S. firms raise their incomes, they reduce the incomes of American firms and individuals that serve foreign markets. Consumers who buy protected products must pay higher prices and face a reduced range of choices. The benefit for the protected firms and industries, then, comes at the expense of consumers in general and firms that export.

Unfortunately, the losses incurred by those who are harmed by the protective measures will be greater than the gains of those who are helped. In free markets, specialization and exchange encourage people to engage in those activities for which they are the most productive. Trade protection stifles this process, so that total output falls. And, when this occurs, we begin the long trek down the road to the general impoverishment of our society- -in the name of “protecting” those firms whose owners and employees are enriched at everyone else’s expense.

We have gone through this before. In June 1930, during the early stages of the Great Depression, Congress tried to protect Americans by enacting huge tariff increases. Such intervention served only to lengthen and worsen the depression. Current proposals are inviting another Great Depression. The freedom to choose our specialization and to exchange with whomever we wish is the only way to guarantee prosperity.

ASSOCIATED ISSUE

October 1989

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